User Options

Subscribe

Archive for the ‘Finance’ Category

Soooo. Ireland has emerged from Reccession. Fan bloody tastic. The FF’ers must be pissing themselves with excitement.

Of course if you are stupid enough to believe that the collapse of the Irish economy was just something that “happened”. If you are stupid enough to believe that mad FF policies had nothing to do with it, then you might just be stupid enough to believe that FF have solved our economic woes and everything is going to be grand from now on.

But wait. Hang on. Why are there more people unemployed now then there were last month, you know…back in the days of the recession?

Could it be there’s more to this story than the FF’ers would have you believe?

If FF threw you from the roof of the Dail, would you be happy when they walked over to your bloodied body lying in the car park proclaiming “See, you’ve stopped falling, you’ve turned a corner.”

Of course FF wouldn’t leave it there. They’d dwell on the fact that they built the car park that halted your decline, and gloss over the fact that car park or not you were eventually going to stop falling.

Recovery is not about halting a decline. The all too resistible force force called gravity, and the immovable object called ground will always conspire to halt a fall. Recovery is about getting back to healthy.

To labour the falling man analogy a little more, when the ground stops you falling it doesn’t stop your health declining. If your injuries aren’t treated properly and if you don’t do the right things you can actually find yourself injured beyond repair and living out a miserable existence.

Ireland’s Unemployement continues to grow despite the fact that thousands have left the country. Less people working supporting more and more people not working.

The full and final scale of losses from Anglo, Nama and the rest has not been totaled up and added to our national debt yet.

The full and final scale of losses from running a massive deficit has not been totaled up and added to our national debt yet.

It’s great news that some multinationals are growing their profits and that statistically Ireland is out of recession. But if anyone tells you that we’ve turned a corner they are lying.

The troubles in the sub prime lending industry in the US have made headlines around the world. In simple terms a lot of lenders found themselves with too much cash on their hands and not enough people to borrow it. Their solution was to lower their standards to the extent that almost anybody could qualify for a mortgage.

I’m sure at the time is seemed like a good idea. These less qualified borrowers get charged a higher rate to compensate the lenders for the higher risk. In a rising housing market the homes that these mortgages are secured against have probably risen in value and can be sold for enough to clear the mortgages should the borrower default. It’s a Win-Win situation.

Until the market stops going up. When that happens all bets are off. The number of defaulting borrowers goes up. The back door of foreclosure is no longer as reliable as it once was. Lenders can no longer pay their investors. Companies that were the long the darlings of Wall St. find themselves as bankrupt as the borrowers that they coaxed into unsuitable loans.

Let’s be clear, the Sub Prime woes have been caused by little more than greed. When lenders had scraped the bottom of the barrel to find borrowers, they kept going, digging a hole under the barrel to find even more borrowers who could only afford mortages with artificially low initial payments. In some cases the payments were so low they didn’t even cover the interest. Each month the borrower owed more than the last.

This was the case with Denith Harrigan, a disabled veteran on a fixed income of $2100 a month. He was offered the change to refinance his existing mortgage at the low low rate of 1%. It would give him the chance to pay off credit card debts and fix his pool.

What Harrigan claims he didn’t understand was that in less than three years, his payment could grow to equal his total income. Yes, it may be difficult to comprehend this but people really do fall for the 1% mortgage scam. They really do believe that the rate and the repayments will always stay that low.

I can say from first hand experience that “some” mortgage brokers are not anxious to correct any wrong ideas that the prospective borrower might have. When we were shopping around for a mortgage one broker offered a so called “Negative Amortisation” mortgage. It was the classic 1% pitch.

The quotation looked very good, the monthly repayment was exactly what it would have been if my mortgage rate was 1%. If you plugged the details into any mortgage calculator it confirmed the figures.

What the quotation didn’t explain that the other 7% interest that I was being charged wasn’t being paid by my monthly repayment, it was getting added month after month onto the principal. In simple terms I was going back each month are borrowing more and more money.

I played along for a little while pretending to be dumb to see if the broker would highlight that the 1% rate was more of an illusion than a reality, and that although I wasn’t writing a cheque each month for the full amount, I was most definitely getting charged the full amount. He didn’t. It was only when I asked direct questions that I already knew the answer to that I got the real facts.

If you know enough to ask those questions then you probably don’t need to even ask them. The vunerable borrowers are the ones who look at a quote and a monthly repayment and don’t realise that the rate and the repayments automatically increase.

And to be fair to these people, I only started asking questions because I knew that no mortgage lender could lend money at a rate of 1%. What percentage of the population do you think understand enough to know at a glance that an interest rate is too low to make sense?

Harrigan should have known better. According to newspaper coverage he earned a real estate license in 2003 and has studied accounting. Now I know a real estate license is hardly difficult to get, and they didn’t say he qualified as an accountant. So it’s hardly a ringing endorsement.

It does open up the possibility that Harrigan new what he was getting into. The industry has screwed so many people with these mortgages that government are sitting up and taking notice. Governer of Florida Charlie Christ has signed a bill required brokers and lenders to explain the loans more clearly.

When everyone starts accepting that the people who got into these loans were victims it becomes a little easier for those who knew what they were doing to also claim to be victims.

These “Neg Am” mortgages were widely used by investors hoping to flip properties. They were used by some homeowners who wanted to clear credit card debts, and who believed the Negative Amortisation would be offset by ever increasing property prices.

Harrigan managed to clear his credit card debt, fix his pool and at the same time lower his monthly repayment. Was he a victim? I don’t know.

It’s hard to tell which group a particular borrower falls into, and given the predatory and dishonest practices of the US lending industry it’s probably safer on average to give the benefit of the doubt to the borrower.

A couple of years ago I read the Motley fool regularly. I liked the philosophy, the articles were informative, the discussion forums were lively and interesting.

Somewhere along the way I lost interest. I don’t even remember what it was exactly that turned me off. I vaguely remember it having something to do with the amount of advertising. It may have been the shift to paid subscriptions in 2001. There wasn’t a specific incident as far as I can recall, I just lost interest.

Even though I don’t visit the site I’ve always held the view that they were a high quality operation. I assumed that when it came to financial hogwash they’d be on the side of debunking it and protecting consumers, rather than propogating it.

That’s why when I received what I assumed was a spam email promoting a get rich quick scheme, I was surprised to see that it came from The Motley Fool.

Now, I know that spammers aren’t above spoofing someone else’s identity to hide their own. Spammers have in the past sent spam claiming to come from some of my own domains, so I looked into this, thinking perhaps the Motley Fool might like a heads up that this financial nonsense was claming to come from them.

I was floored to find this wasn’t a spammer spoofing an address. The product being peddled actually was from The Motley Fool. So ended any chance that I would ever return to the site.

First a little history. When the dot com bubble popped in 2001 The Motley Fool realised that they weren’t going to be able to collect the kinds of revenues from advertising that they had previously. They switched to a model of selling (subscriptions, reports, newsletters etc) to it’s members.

Nothing wrong with that, it’s worked out very well for them, and I’m sure many of the products they sell are fine. The one they advertised to me through my mailbox was not fine however. It had all the hallmarks of a scam.

Here are some of the characteristics you expect to find in junk email promoting get rich quick schemes.

1. They tend to be very long. These emails don’t stop at telling you about the great idea. They tell you about it over and over and over. Very repetitive, numerous quotes endorsing the scheme etc.

The Motley Fool email is long. Very Long. It takes 25 seconds just to scroll down through it without pausing to read any of it.

2. They emphasis what you could have won. The biggest sign of a get rich quick scheme that you should run from is that it dwells a lot on past successes, and tries to convince you that they could have been predicted in advance.

The Motley Fool email has numerous examples of people who turned thousands of dollars into millions of dollars. The message is clear, we could have predicted the success of these people and we can do it again.

The mail also hammers home the idea that it is giving you the insider scoop on the next Starbucks. It talks at length about the phenomenal growth of Starbucks, how it could have been predicted, and how much you could have made if you had invested.

This is the oldest trick in the financial charletain’s arsenal, don’t fall for it.

3. They emphasise they this isn’t a get rich quick scam. I’ve never read about a get rich quick scam that didn’t point out that it was not a get rich quick scam. In fact I’ve gotten to the point now that when someone explains that their system isn’t a scam I assume that it is.

The following comes from The Motley Fool email:

I’m not a starry-eyed novice pitching some bogus money-making “system.” I’ve done my homework, and I know a rat when I smell one. Like you, I have a reputation to protect, and I’m not easily duped.

“The Motley Fool stands out as an ethical oasis in an area that is fast becoming a home to charlatans.”
— The Economist

4. They stress what you’ll be getting for free, and gloss over the fact that you have to pay for it.

Throughout the Motley Fool Email there is much talk of the free report that you can receive that will reveal the next Starbucks. There are 17 mentions of this famous “Free” report.

Do you know how many mentions there are of the $199 subscription that you have to take out? None. Not one. Despite the incredible length of this email, they couldn’t find anywhere to squeeze in the fact that the report is “Free” with a $199 per year subscription to a Newsletter.

Towards the end of the email they do tell you that you need to subscribe, but you have to visit their site to find out the “Low Price”.

5. The Money Back Guarentee.
The trial period scam has been around for years. Sign up for a subscription and receive a free gift. The honest version of this scam assumes that some of the people who don’t want the subscription will be too lazy or will will simply forget to cancel within the trial period.

The dishonest version makes it as difficult as possible to cancel, or in some cases continues to “accidently” charge the customer even after they’ve cancelled.

I’m going to assume that The Fool are taking the honest approach and hoping for customer inertia to deliver them subscriptions.

I’m being generaous by giving them the benefit of the doubt here, the rest of the mail has all the signs of dishonesty that I’d expect from the worst scam artists. If it was a lesser known website I’d be 100% convinced that they’d take the money and run.

Yes, you’re not imagining it, there’s the unmistakable stench of a scam eminating from this scheme.

I have to say I was completely taken aback by this email. I’m still baffled that a brand with a reputation for straight talking and honesty would get involved in this kind of thing. I guess when you go down the road of selling financial information it takes a certain amount of character to avoid falling into the trap of peddling crap at high prices.

On Monday June 11th, The Irish Independent announced to the nation that a “Woman with €28,000 debt was offered a credit card”. A 28 year old woman (i.e. a consenting adult) applied for a credit card, and apparently was so shocked when she was approved that she called national radio station to tell them.

The Money Advice and Budgeting Service (MABS) were also shocked. They called for the setting up of “a sophisticated new register that would monitor all financial agreements”.

MABS would have us believe that by lending money to this woman, MBNA are being irresponsible. “Those institutions who carelessly lend to already overindebted consumers should be required to have the loans written off where carelessness lending is proven”.

This is where I take issue with MABS. Is this a case of careless lending, or careless borrowing? MABS seem to be suggesting that it is irresponsible for banks to allow their customers to be irresponsible. Who gets to decide what constitutes careless lending? If it’s the borrower who is being careless why would we want to hold anyone but them responsible?

There are many 28 year olds with €28,000 of debt who could easily deal with having access to a credit card. A 28K loan over 5 years should cost less than €600 a month. Assuming our consenting adult had a steady job with a half decent income €600 a month shouldn’t be too much to come up with.

We don’t know her salary, or how much if anything she pays for rent etc. It wasn’t mentioned in the article. MBNA knows however, they asked, and they were presumably happy with the answers they received. Nowhere in the story is there any suggestion that the woman lied, so we must assume that MBNA gave the go ahead for this card based on accurate information. If the concern is that MBNA didn’t ask for proof then we get to the knub of this issue, Dishonesty.

If our consenting adult lied about her financial situation then she is to blame for any trouble she gets into. It might be wise for MBNA to protect itself from bad debts by checking out the stories told by potential customers, but are they to blame if a customer lies and gets into trouble?

If there is dishonesty or trickery on the part of a bank in their dealings with a customer then they should be punished, but this isn’t a story about a dishonest bank. They didn’t mail out this credit card unsolicited, they didn’t hide any terms or conditions, they didn’t trick the applicant into something. They sold a product to a consenting adult, who apparently told the truth.

What MABS seems to want is a system which rewards irresponsible borrowers, a kind of debt amnesty for 28 years olds who go on holiday even though they’ve racked up a €1000 euro for each year they’ve spent on this earth.

The MABS attitude on this issue is dangerous on so many levels it’s almost difficult to know where to begin. Firstly it reinforces that belief that it’s the banks job to decide whether or not you should get credit. The bank is no better suited to that than a barber is to deciding whether or not you need a haircut.

Secondly it panders to the victim complex that is increasingly evident in society. It’s someone else’s fault that I owe all this money, it’s someone else’s fault that I paid more than I could afford for a house, it’s someone else’s fault that I didn’t care that interest rates could increase.

While there may be cases where a person ends up in debt due to the actions of another, in the vast majority of cases it is the fault of the debtor themselves. Certainly in the case of our consenting adult in the MBNA story, the fact that she was about to go on holiday despite owing €28,000, and the fact that she claims that a year from now she’ll be in so much debt that she won’t know what to do, suggest that she has no one to blame but herself.

The MABS approach creates a charter for irresponsible borrowers. Borrow as much as you want, the more the better in fact, if you can prove at some point in the future that the banks shouldn’t have lent you the money, you won’t have to repay it.

Finally the MABS approach forces us all to live and work within a system that has been dumbed down to the needs of the financially irresponsible. By definition the system will add additional layers of complexity, enforce additional burdens of proof on borrowers, and will in some cases result in credit being refused to people who may in fact be perfectly capable of handling it. No matter how “sophisticated” a vetting system is there will always be cases that fall between the cracks.

Customers of financial services must already put up with the hassle imposed by money laundering legislation. It’s a fact of life that law abiding citizens must at times be inconvenienced to protect us from the minority that breaks the law. When we start inconveniencing everyone to protect a minority from their own stupidity then we create a solution that is worse than the problem it seeks to solve.

Of course banks prefer customers who pay interest rather than earn it. The ideal customer for a bank is someone on a good salary who’ll be happy paying the minimum amount and staying in debt forever.

In the United States credit card companies use a range of tricks to ensure their customers get into debt and stay in debt. These tricks include holding cheques until after the due date so that late fees are incurred, and dramatically increasing the interest rates on cards for even one missed payment. In some cases the late fees and penalties can amount to 2 thirds of the debt owed by the borrower.

Perhaps we need some oversight to ensure that Ireland never ends up with that kind of abusive industry, but talking about irresponsibly lending is not the way to go about it. The thing we need to fear most are not careless lenders effective premeditated preying on the most vunerable customers.

Nothing in the National News Story of the 28 year old with a credit card suggets that she was tricked, or that her €28000 debt was caused primarily by excessive interest rates and penalties. Nothing that I’ve seen or hear leads me to believe that there is a widespread problem with predatory lending in Ireland.

We can’t ensure that things stay that way by telling consumers that it’s the banks responsibility to keep them out of trouble. We need consumers that are educated. We need people who know that it’s in the banks interest to keep them in debt.

MABS should focus on educating the 28 year old woman at the center of this story about how to stay out of debt. The money that would otherwise be wasted policing every financial agreement in the country should be put towards the creation of a comprehensive personal finance curriculum in our schools.

I’m reluctant to accuse someone flat out of lying. For one thing all I have to go on is their own words. I have no way of knowing whether they intend to mislead me, or whether they are doing so unintentionally. So I’ll give the protagonist in this post the benefit of the doubt and say that he’s either lying, or he’s really stupid and actually believes what he’s saying.

You can make up your own mind. Based on the fact that he holds a senior position in a bank I’m guessing he understands what he’s saying just fine. Whatever you think of his motives, read on and see how to avoid spending over €800 that you don’t need to spend.

As the SSIA’s start to mature the banks face the very real possibility that people may actually spend their savings and continue saving into the future, greatly reducing the need for loans. If you read my Addicted to Debt post then think of this as the equivalent of a great national methadone scheme for debt addiction.

This is not good news for lenders. Yes, there are still pleanty of addicts out there, and even some of the SSIA holders will fall off the wagon and back into the clutches of debt. But the banks can’t take any chances, so Donal Buckley’s piece served as essentially an advertisement for borrowing, even when you have savings.

First some facts. It almost never makes financial sense to have any short to medium term high interest debt while also holding savings. The reason for this is that debt costs more in interest than savings earn.

If you can find a debt that’s cheaper than the return you’ll get on saving or investing, then by all means borrow as much as you can and earn a profit on the deal. Such deals can be hard to find. A simple savings account as suggested by Stephen Dargan isn’t one of those deals.

Mr Dargan suggests keeping €18000 in a savings account, while at the same time borrowing €18000 to buy a car. What he tries to claim is that it makes financial sense to leave yourself out of pocket. I.e. it makes sense to pay your bank interest on a loan you don’t need, while earning less interest on savings you could have used instead. The amount he says you’ll pay in unneccesary interest is “only” €821.25.

You read that right. Stephen Dargan of Bank of Scotland is effectively advising you to write a cheque to his bank for €821.25 and stick it in the post, no questions asked, no strings attached, and expect nothing in return. And that word “only” suggests you’re getting a bargain.

I’ll admit it here, I once broke the law by setting fire to a €5 note (yes I do regret not giving it to someone who would have appreciated it, no comments please). But even I would bawk at flushing €800 down the loo, although I’d prefer to flush it down the loo than give it to Stephen Dargan and Bank of Scotland (Ireland). At least the toilet isn’t telling me It’s a good thing to do.

Here’s how Mr Dargan claims it works. You have €18000 of an SSIA sitting in a savings account. And you want a car that costs €18000.

Say the person borrows €18,000 over 36 months at an APR (annual percentage rate) of 8.5pc. With monthly payments of €565.60 this will mean €65.60 per month in interest payable across the full term of the agreement. In addition, a documentation fee of €75 is payable with an initial direct debit.

So, instead of paying for the car out of cash that you have, you borrow from Mr Dargan, and commit to €565.50 a month for 3 years. He cleverly shortens the term here from the usual 4 or 5 years to 3. This reduces the amount of interest you pay, but still comes nowhere near to having this swindle make sense.

Incidently €565.50 is more than twice the maximum contribution to an SSIA, so Mr Dargan’s scheme leaves you with larger out of pocket expense per month. If he was being honest he’d have used an 8 year loan in his example, or at least the more usual 5 year loan. But if he did that the interest paid would have been so much that everyone would have seen through the enormous hole in his scheme. Aparently an €821 hole is small enough to catch people. What’s €821 in a booming economy like Ireland?

Anyhow, back to his scheme. While you are paying 8.5% on this loan, your €18000 savings is earning you 3.5%, dropping to 3.25% in the third year.

Mr Dargan’s premise seems to be that if you spend your SSIA on a Car you won’t keep up the discipline of saving. That may be the case, but that’s your choice. It still doesn’t make his scheme work.

Now let’s look at the alternative reality. The one where people are not taken in by what amounts to at best gross stupidity, at worse a deliberate attempt to misead people about how to manage their finances.

Let’s pretend you get your SSIA, and spend it on the CAR. Benefit number one, you have not just committed to €565.50 a month for the next 3 years in loan repayments. If you had that kind of money to spend on a loan, you can now direct it to savings, pay down your mortgage, or spend it on bubblegum, you have that choice, you have that freedom.

Benefit number two, If you don’t put €565.50 into savings in a particular month because the kids need school uniforms, or because you need dental work done, then it won’t show up as a missed loan payment on your credit report. You are in control.

Benefit number three, you’ll be earning interest on the €565.50 a month savings, without paying it all and more back in interest on a loan you don’t need.

Benefit number four, you’ll have gotten ahead of the debt rat race. In 3 years time you’ll have saved enough to buy another car, or take a holiday, or whatever, without needing to resort to borrowing at ever increasing interest rates. If you hold off getting a car for 5 or 6 years you’ll have enough to get a car and have lots of cash still in savings.

Paying interest on loans while you have cash sitting in savings is like calling a cab every morning, paying him to drive to your office on his own, while you jump in your car and drive there yourself. It makes no sense.

Here’s the final piece of Stephan Dargan’s swindle. The position you’ll be in at the end of the 3 years:

the saver will still have their €18,000 lump sum plus their car worth approx €9,000 depending on the make/condition/depreciation etc.

Dargan concludes: “In contrast, if you use your SSIA to buy the same car you may only be left with the car worth about €9,000.”

He is conveniently forgetting the fact that the person over the 3 years paid a fortune in loan repayments which could have been put aside into savings, or even if you’re not disciplined, given you a hell of a good time for 3 years.

You will not be left with only the car worth about €9,000. That’s a deliberate attempt to mislead you. Don’t let him away with it. If he want’s to assume you aren’t disciplined enough to continue saving, then he should also assume that you aren’t disciplined enough to keep the €18000 in the bank under his scheme.

As for Donal Buckley. Shame on you for allowing this advise to make it’s way into a national newspaper under your name. Shame on you. The only redeeming aspect of the column is that it briefly mentions the possibility of putting the SSIA money into a pension.

Doing that, might make sense even if you borrow for a new car, because the tax savings and the return you’ll earn from the money in the pension might be worth more than the interest you’ll pay.

Update:
Donal Buckley has kindly replied to an email I sent him about this, which is more than can be said for Bank of Scotland. I don’t know if we’ll hear any more about it from Donal in future columns, but I appreciate his reply.

There’s definitely a story here about the banker who can’t add. Now that I’d like to read.

There’s a school of thought that says that much of the BOOM in recent years in Ireland hasn’t been driven so much by fundamental improvements in productivity and infrastructure as it has by borrowing.

Does it matter? Isn’t the Boom the important thing, not the source of it?

Well the difference is similar to the difference between a family that buys a new Merc and a big house because they get a big pay rise, and a family that buys a merc and a big house because someone gives them a big loan. To the neighbours the outward signs are the same, but the foundations of the apparent wealth are very different.

Almost certainly some of the boom in Ireland was down to the National Equivalent of a Pay Rise. Huge inward investment, a global IT Boom, in other wards at least in the early years of the so called Celtic Tiger there were fundamental factors that supported the growth.

By now it’s almost certain that the continuation of the boom far beyond the expectations of “experts” has been fueled to some extend by borrowing. In simple terms, Ireland has been like a family that got both a pay rise AND their house shot up in value and they released equity in it. They were swimming in Cash. They bought the big car, moved to a new house, bought every gadget they could find, holidays abroad, the works.

At some point they used up the cash they’d released from the house, but in the meantime house prices jumped further, and there was a whole new trough of equity to drink from.

It was a win win game because the spending itself drives the economy forward, drives up house prices more, It’s like a financial perpetual motion machine.

Except as everyone knows, perpetual motion isn’t possible. Some machines look like they achieve it, but ultimately on each turn of the motor they lose a little power until they eventually run to a halt, unless some fuel is added.

In terms of the Irish Economy the Fuel was debt, and the motor has started turning a lot slower. Even the Energiser bunny has to stop beating his drum eventually.

What should we expect when the fuel runs out? How should people start to behave? If the economy really is running on debt rather than prosperity then we should start to see a shift in the pattern of debt. When the House Equity ATM runs out of cash we should see a jump in other sources of credit. In other words when your Drug Dealer get’s locked up, you don’t quit drugs, you just find a new dealer.

According to this story it seems to be happening. The level of Credit Card debt has jumped almost 19% over the past year. That happened at a time when total lending growth (including mortgages) slowed from 27.9% to 25.9%.

If overall drug use was down slightly, but heroine use had shot up by 19% would you be happy? Neither would I. Hard Credit just like Hard Drugs sows seeds for an unhappy future.

The story ends with talk of sleight increases in mortgage lending towards the end of the year, but down overall from it’s peak. This isn’t good either. Again with the Drug metaphore, Weed use is down overall but there are signs that it crept up again towards the end of the year.

There’s no evidence that the Heroine addicts switched back to softer drugs, it looks more like a new crowd of customers were recruited. Perhaps the Weed dealer got released from Prison.